Ackman May Be Eyeing Exit as JC Penney Bet in Tatters

William Ackman's multiyear bet that he could overhaul ailing retailer JC Penney looks like it may end up being one of his $12 billion hedge fund's worst investment blunders.

On Monday, JC Penney's board dismissed Ron Johnson, a former Apple executive handpicked by Ackman to remake the retailer, and brought back Mike Ullman, whom Ackman has previously criticized.

Now the hedge fund manager is likely searching for his own quick exit from an investment that is costing his $12 billion Pershing Square Capital Management millions in losses and has tarnished his reputation, say industry analysts and investors.

Selling off parts or taking the company private would be ways to quit now that JC Penney's slumping stock price has cost Pershing Square some $500 million in paper losses, people familiar with the firm said.

"The faster Ackman and group sell JCP's valuable assets to someone else, the more value they will capture," said George Bradt, managing director of PrimeGenesis, an executive consulting firm. "The longer they stay distracted with sure-to-fail ideas like fixing the business or taking it private, the less value will be left when JCP finally ceases to exist."

Taking it private is also a viable way for Ackman to get out. Even before Pershing Square and Vornado Realty Trust showed up in 2010, private equity investors were circling.

Today, a purchase would be cheaper with the stock price near at $14 a share, down about six dollars a share from where Ackman started buying. And a deal would still be attractive for players like Blackstone Group, KKR & Co or Apollo Global Management LLC because JC Penney still has valuable real estate holdings, owning nearly half of its space and leasing the rest at $4 a square foot.

Ackman has long championed JC Penney's vast real estate holdings as one reason the company should be trading at a higher stock price. Joining the JC Penney board in 2011, he also said less than a year ago that Pershing Square could make 15 times its money if Ron Johnson's ambitious turnaround plans worked.

But that strategy resulted in Johnson's dismissal, and his plans to upgrade the stores and merchandise is in tatters. Now Mike Ullman, the CEO Ackman forced out has been brought back from retirement to run the company, so there is little reason for an activist investor to stick around.

The usually voluble Ackman has yet to publicly comment on the management changes at JC Penney, and he did not respond to a request for comment for this story.

Shares of JC Penney rose almost 11 percent late Monday after Johnson had been ousted, but the stock fell when the company said Ullman was back, and continued its plunge on Tuesday, its shares down more than 10 percent in early afternoon trade.

"What we have now is clearly the worst case scenario and Bill will be looking to make as graceful an exit as quickly as possible," said one Pershing Square investor, who asked not to be named because he is not authorized to speak publicly.

Privately Ackman has long said the investment could be risky because it relied so heavily on shoppers liking Johnson's plan.

More stinging for Ackman personally may be that he appears to have been marginalized on a board that went back to the old boss, even though Ullman's tenure may not be long given that he has no employment contract.

"It appears the board is grasping for stability and the situation is more dire than outsiders realized," said Damien Park, the president of Hedge Fund Solutions, which tracks activist investors who push for management changes. "Ackman and the remainder of the board have a lot of work to do to demonstrate they're acting as a cohesive group."

One thing Ackman will likely not do is try to put the JC Penney investments into a side pocket the way some other hedge funds have done with their own poorly performing assets.

So far Pershing Square, which has strict liquidity conditions where investors need about two years to get their money back, has not been hit with heavy redemptions and the JC Penney investment is liquid enough to sell it off over time.

Pershing Square returned 6.1 percent during the first quarter even as JC Penney's stock was tumbling, suggesting that investors have no reason to run for the exits right now.

But the pick does cast a shadow over Ackman's record where average annual returns of 20 percent have made him a favorite with pension funds and other big investors.

The failure of Ackman's "candidate has resulted in substantially diminished credibility for him prospectively," said one investor who is not invested with Ackman but did not want to be named due to his continuing work in the hedge fund industry.

This does "not bode well for the board's receptivity to [Ackman's] future recommendations. He is now a neutered activist," the person said.